The case, MDS Inc v Factory Mutual Insurance Company, arose out of a leak at a nuclear reactor in Chalk River, Ontario. The business of MDS Inc. involved purchasing the radioisotopes produced at that reactor and processing them for eventual sale. When the reactor shut down for fifteen months following the leak, MDS turned to its insurer to cover its business interruption losses. The Court held in favour of the insured on all coverage issues, finding that all the exclusions and exceptions at issue should be interpreted in MDS’s favour. While a lot of digital ink has been spilled on the Court’s handling of those coverage issues, the Court’s decision regarding prejudgment interest has received relatively little attention.
MDS argued that, to be fairly compensated for its loss, it should be entitled to prejudgment interest based on the actual cost of borrowing from the date of loss to judgment (around five to six per cent), not the simple interest rate contained in the Courts of Justice Act. MDS maintained that had the insurer paid the loss promptly, it would not have had to borrow the funds in the amount of the policy limits. Further, it argued that it would be unfair for the insurer to realize a profit from its refusal to pay. On the other hand, the insurer’s position was that the Court should not award the actual cost of borrowing because “there is not a single insurance case in Canada” where that was done.
Finding for the insured, the Court took into account the following points in support:
- the history of the concept of prejudgment interest and case law on the issue, such as the concept that prejudgment interest is compensatory, not punitive;
- the discretion conferred on judges by the Courts of Justice Act to award higher interest rates;
- the relationship between the insurer and its insured, particularly given that the insurer was MDS’s long-time insurer, so it knew that the supply of isotopes from the reactor constituted a substantial proportion of MDS’s income, and thus it knew that MDS was seriously vulnerable and could not mitigate its damages;
- the insurer’s conduct, including its decision to deny the claim before the parties knew all the facts, and its refusal to change its coverage position in light of the developing evidence. While the insurer’s denial letter stated that it would consider any additional information that might affect coverage, the Court held that this assertion rang “hollow in light of the history. The battle lines were drawn early before the facts were known”. According to the Court, the denial letter read more like a pleading than an adjuster’s letter;
- the claim for commercial interest was reasonably foreseeable, because MDS put the insurer on notice from the date the proof of loss was filed that MDS was seeking “all losses, damages and expenses flowing from the Insurer’s refusal to pay in accordance with the Policy” as well as pre and post judgment interest “as appropriate”. Moreover, it was reasonably foreseeable that MDS would have to borrow at market rates to compensate for its losses;
- MDS filed undisputed expert evidence that estimated the insured’s actual cost to borrow the funds it would have received but for the insurer’s denial, and the insurer’s profits it earned because it failed to pay MDS;
- the Court stated that paying commercial rates was a Pareto-efficient result where both parties benefited, because the insured’s $12 million prejudgment interest award was less than the $17 million in profits the insurer realized from its delayed payment; and
- that the risk of being liable to pay commercial interest would prompt insurers to work quickly to resolve claims, which supports the public policy consideration of encouraging early and fair settlement by insurers.
- Counsel and adjusters would be wise to carefully consider this case in any future insurance coverage dispute, as it sets out a number of factors that a Court could consider in deciding whether to award commercial interest rates. In particular, the Court focused on the conduct of the insurer in coming to its decision, such as early denials, pleading-like adjusters’ letters and refusals to change a coverage position, which are not uncommon. An insured seeking commercial interest would have to ensure that it could present evidence on the insured’s cost of borrowing and the insurer’s profit on the unpaid funds, which will allow the Court to weigh the benefits to both sides if commercial interest were awarded.
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